The settlement, which Nelnet announced late Friday, is the latest to result from a lawsuit brought by Jon H. Oberg, a former Education Department researcher, on behalf of the federal government. A federal judge ordered Nelnet and seven other student-loan companies to participate in a settlement conference last week after two of the other defendants in the case, Brazos Higher Education Service Corporation and Brazos Higher Education Authority, reached a tentative settlement agreement with Mr. Oberg.Among the other defendants in the case is Sallie Mae, the nation’s largest student-loan company. A year ago, the Education Department’s inspector general issued an audit concluding that Sallie Mae overbilled the Education Department for $22.3-million in student-loan subsidies and should be required to return the money to the department.

The second shows that for-profit universities have much lower rates of student loan repayment:

Although the department issued no analysis or comparison of repayment rates by sector, outside advocacy groups that analyzed the data found that in 2009, repayment rates were 54 percent at public colleges and universities, 56 percent at private nonprofit institutions, and 36 percent at for-profit colleges.

“I think it’s notable that the for-profits are the only type of school where the majority of students are unable to repay their loans,” said Debbie Frankle Cochrane, program director at the Institute for College Access and Success, which has called for tighter regulation of for-profit institutions.

At some for-profit colleges, the repayment rates were startlingly low. For example, 33 of the 86 Corinthian Colleges’ Everest locations had repayment rates of less than 20 percent — and at several, the rates were less than 10 percent.

At the headquarters of the University of Phoenix, the nation’s largest for-profit education company, the repayment rate was 44 percent, compared with 38 percent at DeVry and 27 percent at Kaplan University, a unit of the Washington Post Company.

“I think this data could have a powerful effect on institutions and students,” said Terry Hartle, senior vice president at the American Council on Education. “No reasonable person will want to go to a school where only one in five students can pay back their student loans.”

The second story sent education stocks lower on Wall Street: If students have a harder time repaying loans to for-profit universities, they might look to other options. But the first story sent Nelnet’s stock up, as the company, had it not come to a settlement, might have faced a much, much larger penalty — three times the $407 million it defrauded from the government, The New York Times says.

Lieber elucidates the point by telling the story of Cortney Munna, who lives in pricey San Francisco, makes $22 an hour and owes $97,000 to Citibank and Sallie Mae for her New York University diploma. She is a photographer’s assistant, and has no intention of going into a high-paying career in a field like finance. She is stuck, and her mother might end up selling off her bed and breakfast to rid her of debt.

Lieber’s story is particularly exceptional for making the argument others are loath to make: that Munna’s education was not worth it, and that she would have been better off dropping out and enrolling somewhere cheaper. Of course, on aggregate, people with college diplomas significantly out-earn those without them. And of course, it is impossible to calculate the value of time spent in school or of education for its own sake. But in Munna’s case, where a college diploma makes no difference in her earning potential in her chosen career, remaining in a pricey institution — New York University is the fourth most expensive out of the nation’s 1,800 private colleges — might not have been the right choice.

“For a long time, our student loan system has worked for banks and financial institutions,” Obama said. “Today, we’re finally making our student loan system work for students and all of our families.”

Sallie Mae, the nation’s largest student lender, felt differently.

The vote was a technicality. The House had passed the bill Sunday night, sending it over to the Senate. But obscure rules governing the reconciliation process forced Senate lawmakers to strip two small provisions before they passed the bill this afternoon. The changes meant that the House would have to approve the proposal again before it could go to the president’s desk — which it did by a vote of 220-207.

Here’s a recap of how reconciliation tweaks the larger bill:

1) Funding: The Senate bill would hit the wealthiest Americans — individuals earning more than $200,000 and families earning more than $250,000 — with a 0.5 percent increase in the Medicare payroll tax. The reconciliation bill would add a 3.8 percent tax on unearned income — a category that includes things like interest, dividends and capitol gains on investments.

The Senate bill also applies a 40 percent tax (beginning in 2013) to the highest-priced insurance plans — those costing more than $8,500 for individuals and $23,000 for families. The reconciliation bill keeps the tax, but hikes the dollar threshold that trigger it — to $10,200 for individuals and $27,500 for family plans. In both the Senate and reconciliation bills, the thresholds are even higher for those in high-risk jobs like coal mining and firefighting. The reconciliation bill also postpones the tax until 2018.

2) Doughnut Hole: As part of its $80 billion deal with Sen. Max Baucus (D-Mont.), the pharmaceutical lobby agreed to cut the cost of name-brand drugs by 50 percent when seniors hit the doughnut hole, which is the not-meant-to-be-flattering name of the coverage gap in Medicare’s prescription drug benefit. And that’s where the Senate bill leaves it.

The reconciliation bill builds on that foundation, giving seniors in the doughnut hole an additional $250 toward their drugs in 2010, and then hiking that amount incrementally until the doughnut hole is fully closed by 2020.

3) Individual Mandate: The Senate bill requires most Americans to buy health insurance or pay a financial penalty of either $750 or 2 percent of income, whichever is larger. The reconciliation bill would alter the penalty slightly, to the larger of $695 or 2.5 percent of income.

4) Medicaid Rates: While expanding Medicaid coverage to include most folks living below 133 percent of the federal poverty level, the Senate bill would leave Medicaid rates alone. This is a problem, because Medicaid rates are so low that more and more doctors are refusing to see those patients. Recognizing that there’s little value in a health insurance program that doctors don’t accept, House leaders in their reconciliation bill hiked Medicaid rates for primary care services to at least the level that Medicare pays.

5) Cornhusker Kickback: The Senate bill includes the now infamous sweetheart deal that Democratic leaders carved out to win the vote of Nebraska Democrat Ben Nelson. Under that provision, the federal government would pay 100 percent of the cost of expanding Medicaid in Nebraska — forever. (By contrast, the other states would begin paying a portion of those costs over time.)

The reconciliation bill strikes the Cornhusker Kickback dead.

The reconciliation bill also eliminates $61 billion in federal subsidies to the private middlemen who make student loans.

The health care reconciliation bill, while predominately made up of health-focused reforms, also included language to eliminate the Federal Family Education Loan program, under which the government subsidizes private lenders that cater to students — and guarantees those loans so the private companies assume no risk when loans default. Instead, under the Democrats’ bill, all loans would originate directly from the U.S. Treasury (though private lenders would still compete to service them).

The Congressional Budget Office estimates that the changes would save the government $61 billion over the next decade, most of which would fund an expansion of scholarships for low-income college students.

The reconciliation bill, of course, still has to clear the Senate to become law. And while the Democrats say they have the 51 votes to pass it, they’ve been reluctant to release the names of those supporters. The focus of the Senate debate is sure to be on the health care side of things, with conservatives on both sides of the aisle blasting provisions like the new 3.8 percent tax on unearned income. But it’s worth mentioning that a good handful of Senate Democrats might also oppose reconciliation based on the lending reforms.

A group of Republicans this afternoon will meet with reporters to protest the Democrats’ plans to eliminate tens of billions of dollars in government subsidies to private companies that lend to students. The Democrats’ bill would have students borrow directly from the U.S. Treasury, which makes sense to supporters because it’s the Treasury that currently assumes all the risk for those loans anyway — a boon to private companies that assume no risk. The Congressional Budget Office estimates that eliminating the private middleman will save $67 billion over the next decade, most of which will go toward expanding college scholarships to low-income students.

No matter. “Such a move,” the Republicans’ release claims, “is an abuse of the legislative process that will eliminate borrower choice and competition, destroy tens of thousands of jobs, and add to the country’s long-term debt.”

The group includes Sen. Lamar Alexander (Tenn.), chairman of the Senate Republican Conference; Rep. John Kline (Minn.), the senior Republican on the House Education and Labor Committee; and Rep. Brett Guthrie (Ky.), the top Republican on the higher education subpanel.

It’s worth noting that not all conservatives agree. In fact, President George W. Bush proposed similar reforms as part of his annual budget proposal during three years of his tenure. More recently, The Weekly Standard blasted the current system of guaranteed loans as “a textbook example of crony capitalism or (if you prefer) corporate socialism.”

The government assumes all the risk while doling out contracts to favored businesses, who then reap the profits. With student loans, the lender gets preening rights in the bargain, marketing itself as a Merchant of Dreams, a benefactor of America’s youth, a sweet-tempered Mr. Jaggers to a nation of eager Pips.

In truth, the only people who like the system of guaranteed loans are the student loan industry — now handling more than $90 billion a year — and the congressmen whose districts contain large numbers of people who work in the student loan industry.

Earlier this month, Rep. Thomas Petri (Wis.), a senior Republican on the Education and Labor Committee, also condemned the current lending framework as a boondoggle enriching private lenders at the expense of taxpayers and students.

“Private loans are much more expensive for borrowers — and much more profitable for lenders,” Petri wrote in Roll Call. “We’ve seen how this plays out — and it isn’t in the form of true choice or competition for students.”

Perhaps GOP leaders knew where Petri stood when they skipped over the 16-term Wisconsin Republican to install Kline — a more conservative four-termer — atop the GOP team on the Education and Labor panel.

The Glover Park Group, a DC-based political consulting firm founded by former Clinton staffers, blasted the lending legislation yesterday, just about the same time that the bill’s Democratic sponsors — Sen. Tom Harkin (Iowa) and Rep. George Miller (Calif.) — were promoting it on Capitol Hill.

“Miller and Harkin Push a Bill Doomed to Fail while Rejecting Bipartisan Solutions,” a Glover Park operative, Tim Miller, wrote in an unsolicited e-mail message to reporters. “While Miller and Harkin misguidedly storm forward with a bill that is doomed to fail, colleges and students are being denied the immediate benefits that would result from bipartisan, comprehensive student loan reform that could be passed with a few enhancements to the legislation.”

The “enhancements” the Glover Park crew is endorsing are found in a separate proposal that would allow private lenders to keep making student loans — and to keep profiting from those loans. So is it just a coincidence that the nation’s largest student lenders are pushing the very same proposal?

“We don’t comment on our clients,” Miller of Glover Park wrote to Herszenhorn.

Rep. George Miller (D-Calif.) (Bob Larson/Contra Costa Times/ZUMA Press)

As Capitol Hill Democrats consider proposals to pull the country out of its huge deficit hole, they’re repeatedly running into a formidable impediment: themselves.

On issues as diverse as health care and student lending, provisions designed to rein in deficit spending have all run smack into the ubiquitous inclination of lawmakers to protect their home turf from the scalpel of budget cuts. Their message is familiar: Congress must do something to get its fiscal house in order, just don’t do it in my back yard. And party affiliation is largely irrelevant.

[Congress1] The most recent case surrounds a popular proposal to eliminate government subsidies to private companies that lend to students. The legislation, which has already passed the House and enjoys enthusiastic support from President Obama, would save the government tens of billions of dollars over the next decade — most of which would go toward expanding scholarships for low-income college students. Never an overly partisan issue, it was proposed by President Bush several times during his tenure. Senate Democrats are hoping to attach the legislation to their sweeping health care reform proposal.

Not so fast.

Those billions of dollars don’t go nowhere. And six Senate Democrats — Bill Nelson (Fla.), Blanche Lincoln (Ark.), Ben Nelson (Neb.), Mark Warner (Va.), Jim Webb (Va.) and Tom Carper (Del.) — voiced their objections to the proposal on Tuesday. The lawmakers — most representing hubs of large, private lenders — say they support student loan reform “to generate historic budget savings,” but have concerns that the White House proposal “could put jobs at risk.” They’re asking Senate Majority Leader Harry Reid (D-Nev.) to approach any action “in a thoughtful manner that considers potential alternative legislative proposals.”

Though short on specifics, the message is clear: The lawmakers want to rein in spending, but not if it threatens jobs in their states.

It’s an argument that’s applicable to almost every budget reform lawmakers tackle. That is, even if some industry, or project, or siphon of federal spending is utterly wasteful — even if it’s utterly pernicious — it’s still likely that somebody’s livelihood depends on it, and therefore someone in Congress is going to defend it. (Some examples include the fights over dropping the F-22 fighter jet; canceling the presidential helicopter; and forcing the automakers to keep dealerships around even if they weren’t selling cars).

In a more recent case, the Senate, as part of its health care bill, included creation of an independent commission empowered to recommend Medicare pay reforms if Congress didn’t do enough to control program costs. The recommendations would take effect unless Congress voted them down. Yet House Democrats are balking at the idea. Rep. Mike Capuano (D-Mass.), for example, sent a letter to supporters Thursday, saying he’s worried that the panel’s recommendations “would quickly and inevitably result in Massachusetts losing tens of thousands of jobs and would seriously undermine one of our region’s economic engines.”

“Other regions with heavy concentrations of health care would feel a similar impact,” he wrote.

Such resistance highlights the question facing leaders on Capitol Hill as they try to rein in federal deficits: How does Congress “generate historic budget savings” when thousands of jobs likely hinge on the spending?

The question is timely — and not only because the country is in the middle of a jobs crisis. The nation’s budget deficit hit $1.4 trillion last fiscal year and is on pace to top that figure this year. Much of that spending represents emergency measures enacted to address the recent economic downturn, the worst the country has suffered since the Great Depression. Yet even absent those temporary measures, federal spending remains on an unsustainable course, with Medicare and Medicaid alone threatening to swamp the federal budget in a few short decades.

Aiming to maximize tax dollars, the House passed a bill in September that would eliminate the Federal Family Education Loan program, or FFEL, under which the government subsidizes private lenders that cater to students. Instead, all loans would originate directly from the U.S. Treasury, though private lenders would still compete to service those loans. The Congressional Budget Office has estimated that the provision to eliminate the for-profit middle man would alone save the federal government $67 billion over the next decade. The bill’s sponsor, Education and Labor Committee Chairman George Miller (D-Calif.), told reporters at the Capitol Thursday that the current system represents “a titanic boondoggle in excess subsidies to some of the nation’s rich and most powerful banks.”

Banks, he could have added, that employ large numbers of folks in a large number of states.

The regional protectionism is hardly limited to Democrats. When the White House last month proposed to cut an expensive defense contract in Alabama, for example, GOP Sen. Richard Shelby (Ala.) was quick to retaliate, placing a hold on every Obama nominee before the Senate. When President Bush vetoed a $300 billion farm bill in 2008 — citing taxpayer subsidies to wealthy farmers — it was Sen. Saxby Chambliss (R-Ga.), among other farm-state Republicans, to rally the successful override. The list goes on.

Joshua Gordon, policy director for the Concord Coalition, a budget watchdog group, said the FFEL debate mirrors that over Medicare Advantage, the program under which private companies cater to Medicare patients. Each program represents “a system that everyone knows is inefficient,” Gordon said, but reforms have gone nowhere in Congress, largely due to the local interests of some members.

The reluctance of Congress to make difficult budget decisions, Gordon added, only bolsters the argument for an independent deficit commission “empowered to think of the country on the whole and not just individual districts.”

Then again, in bipartisan fashion, the Senate shot down such a proposal last month.

“There is one thing that often unifies Congress,” Gordon said, “and that is irresponsibility.”

An empty quad at the University of Illinois (Flickr: BParedo)

With a growing number of college grads finding themselves crushed under the weight of their student loan debt, the Obama administration is considering action that could derail the entire student loan industry.  Groups who monitor campaign contributions, though, worry that the strength of the industry could block any shot at real change.

The student loan industry is big business. A total of $89.5 billion in loans was originated in the 2007-2008 school year, $22.5 billion of which was in the form of private loans. For students, the stakes are even higher. The default rate on student loans climbed from 5.2 percent to 6.9 percent in only a year, and analysts say the number is likely to rise as the recession continues.

Image by: Matt Mahurin

The amount individual students borrow is rising, too. The average graduate of a four-year college accrues $22,500 in student loan debt, according to the National Postsecondary Student Aid Study . Education advocates say that recent grads and current students are going to bear an increasingly heavy burden when it comes to repaying those debts both because of the growing amounts borrowed and due to the increasing reliance on private loans. For the 2007-2008 school year, 14 percent of students took out a private loan, compared to only 5 percent in the 2003-2004 school year.

The tough job market is another major hurdle. The national unemployment rate was at 8.5 percent in March, and there’s evidence that new grads are hit harder than other groups by the country’s shrinking job pool. Research by the National Association of Colleges and Employers revealed that companies are planning to hire 22 percent fewer new college graduates this year than in 2008. Even students who do land jobs after college might not be out of the woods; another NACE study found that the average starting salary for college grads had declined from 2008.

College students seeking financing can apply for federally-backed or private loans. Federal ones have some advantages in that the costs of borrowing are less and the loan programs have a few consumer protections in place: The interest rates are tied to the three-month Treasury bill rate plus a couple of percentage points, and graduates have a six-month grace period after graduation before repayment must start, although in this economy that might not be enough of a buffer. Deferring the loan is possible, although some agreements may tack on the extra interest that accrues during the deferral period. Former students with anemic job prospects can also extend the term of their loan, paying more interest but lowering their payment to a manageable amount each month. [HERE In the private sector, though, offering any of these options is no more than a courtesy on the part of the lender; there’s no legal obligation for them to cut debtors a break. Since the amount of federal loan money a student can borrow is capped, many have turned to private loans to bridge the gap, especially as the cost of college tuition has risen steadily in recent years. “These lenders have borrowers over a barrel,” said Edie Irons, communications director for the Institute for College Access and Success. “They can be uncompromising.” Even in the case of death or a work-ending disability, she added, private lenders still seek to collect.

Private loans also cost more, sometimes much more. Interest rates are generally variable and several percentage points higher than those for federal loans. Add in a missed payment and default rates of up nearly 20 percent — as much as some credit-card interest rates — kick in. In addition, private loan rules about late payments are nearly always stricter; while it takes months of non-payment to be declared in default of a federal loan, private loans can move into default after only a single missed payment, damaging the borrower’s credit. Since employers in some fields have recently embraced credit checks as part of pre-employment background screening, missed student loan payments could potentially damage a new grad’s chances at a job that would allow them to make those payments.

Student loans differ from other debt obligations like mortgages or credit card debt in a few ways, but one of the most significant is their “stickiness” when it comes to discharging them in a bankruptcy. Student loans are one of the very few types of debt, along with child support and some taxes, that are virtually impossible to have dismissed in bankruptcy. In the case of private student loans, although these lenders aren’t governed by the caps on loan amounts and interest rates imposed on their federally-backed counterparts, they still receive the benefit of the bankruptcy exemption.

While help is on the way via recently passed legislation many in the field worry that it’s not enough. Provisions included in the College Cost Reduction and Access Act of 2007 give students clemency on some loan debt if they go into public service or work in low-income fields, but it only applies to government-backed loans. The Higher Education Opportunity Act of 2008, for instance, required for the first time that private lenders spell out in plain English how much students will be paying in interest and what kind of penalties are levied for missing payments; however, it doesn’t go into effect until next year

“That’s not going to keep [lenders] from making bad loans,” said Deanne Loonin, director of the Student Loan Borrower Assistance Project at the National Consumer Law Center. “It’s just going to require them to tell people when they make bad loans.” Loonin says the legislation is a good start but limited in its scope because it only affects future would-be borrowers, not the many students and new grads currently saddled with cumbersome loans. “Going backwards, you still have all these people who are stuck. We also would like to see some relief for those people.”

One major change Loonin and others would like to see is a modification of the bankruptcy rules surrounding student loans. An amendment that would have made student loans dischargeable via bankruptcy was sponsored Rep. Danny Davis (D-Ill.) last year, but was voted down.

The student loan industry is very generous when it comes to supporting politicians it hopes will look out for its interests. While plenty of banks that offer private loans are regulars on the donation circuit, the powerhouses of federal lending are also paying out large sums to favored lawmakers. The PACs for Sallie Mae and NelNet, two of the sector’s biggest servicers of federally backed loans, turned up at number two and eight, respectively, in a list that of top finance-industry donors that also included banking giants like Bank of America and Citigroup. Sallie Mae gave $800,000 in 2008, while NelNet gave $250,000, according to the Center for Responsive Politics.

One notable recipient of this largesse is Rep. Paul Kanjorski (D-Pa.), who received a combined total of $15,000 from Sallie Mae and NelNet in 2008. Kanjorskiy is a vocal advocate of Sallie Mae. Public policy think tank New America Foundation pointed out in an online article Kanjorski’s personal interest in keeping this lending powerhouse healthy; earlier this month, it shifted several hundred jobs into his eastern Pennsylvania district.

In the tug-of-war over who gets control of these billions of dollars in student debt, industry supporters invoke the specter of massive job losses as an objection to the government’s plan to phase out the middleman in federal loan programs in favor of a direct lending system. Both Sallie Mae as well as the National Association of Student Financial Aid Administrators, an industry trade group, have come up with alternative plans that preserve the role of the servicers. They argue their plans can save just as much money and will preserve jobs, as well.

But it’s not just donations and vote-garnering jobs; lenders also spend a lot of money on lobbying. “Sallie Mae spent $3.4 million in lobbying in 2008,” said Sheila Krumholz, executive director of the Center for Responsive Politics. While this was down from 2007 levels, it’s still a significant investment. “By comparison, Bank of America spent just $4 million,” said Krumholz. “In lobbying is where they’re on par with the heavy hitters. It explains where they’re putting their focus.”

With a new president who has already taken aim at education financing via a plan to phase out private loan programs and handle financing directly through schools, lenders are on the defensive. The administration’s plan for overhauling student lending is facing a fight both from Republicans as well as from within its own party — a measure of how far the industry’s fundraising efforts extended. “The fact that they were lobbying so heavily is indicative of the concern they had last cycle,” said Krumholz. “It appears it was perhaps justified given what they’re facing now. They may have seen the writing on the wall.”

Martha C. White is a freelance journalist in New York.

But curiously enough, the large student loan firms’ eagerness to protect their turf hasn’t yet prompted them to hike lobbying spending. During the first three months of this year, Sallie Mae — the nation’s largest private lender — spent $1.28 million on lobbying, according to a Washington Independent analysis of first quarter reports filed this week. That’s nearly $400,000 less than the company paid for lobbyists during the same period last year.

Meanwhile, Nelnet, another huge private lender, spent exactly as much on lobbying in the first quarter of 2009 as it did during the first quarter of 2008: $170,000.

Could it be that student lending’s private sector players just have less to work with this year? Sallie Mae’s stock lost more than half its value last year as the global financial meltdown crippled the market. Even its political action committee has contributed less to members of Congress during early 2009 than in a similar stretch of 2008.

But Nelnet appears to have exceeded analysts’ expectations with its performance even after the economy fell into crisis. Why aren’t these companies mobilizing with lobbying spending to match the Obama administration’s promised threat to their interests? We may have to wait until K Street next opens its books in July to know the full story.